The first National Development Plan for Uganda adopted the Egg Analogy as a way of logically relating the different sectors and aspects of the economy as one organism. Specifically, the accountability sector, which includes the core functions of planning and financing the economy, were put in the outer sector (shell of the egg) along with defence and security. The idea was that a failure in any of these would imply a cracked shell of the egg, which can result in total loss.
Macroeconomics deals with the big aggregates/variables and the interrelations among the different sectors that make the economy function. The variables include output, growth, employment, the price level and inflation, the government budget, the national debt, exchange rates, balance of payments and interest rates. These macroeconomic variables are so interlinked that a problem in one is likely to be a symptom of weaknesses among several others, which calls for a complete rethinking of many policies.
Consider an increase in the exchange rate resulting from more demand for imports amid declining exports. This has a direct link to the government budget deficit. A prolonged big government deficit sucks resources from other sectors through high interest rates and also pulls resources into the non-tradable sector. The bulk of government services cannot be traded (exported or imported).
Eventually, the private sector fails to perform, unemployment increases, local production falls and triggers a need for more imports of all kinds as new pressure mounts on the exchange rate. The decline in local production and increase in exchange rates puts pressure on domestic prices, resulting in inflation and more pressure on interest rates as the Central Bank tries to secure price stability. Eventually, high interest rates further curtail local production and make a bad situation worse by taking the economy back into the loop.
In summary, the shell of the economic egg is cracked and simply increasing the ‘incubation heat’ (interest rates and both public and private debt) will not save anything. Nothing like a bailout, further borrowing, cries for lower interest rates, and wishes for more exports can fix the problem. An increase in interest rates to stabilise prices will deliver an unsustainable solution since the problem lies in the structural weaknesses of the economy as described above. It is time to get back to the drawing board.
The initial response has to come from government and specifically the ministry in charge of the economy, which constitutionally, is under the President. The President must cause to be laid before Parliament a budget that has a moderate deficit and recognises the multiple linkages between the various aggregates of the economy. Simplistic arguments like ‘infrastructure will increase competitiveness and cause growth’ tend to ignore the role of other variables such as interest rates, exchange rates, private investment and employment.
In an economy like Uganda, with significant structural impediments, an increase in the government deficit simply distorts the macroeconomics and makes it difficult to manage the economy. It triggers misallocation of resources, undermines the private sector and tax revenues, and creates unsustainable debt. The economy becomes prone to external shocks due to weak foreign reserves and stability of prices is attained at a low equilibrium, which is not sustainable.
Uganda requires urgent public sector reforms (policy and institutional) to lower the budget deficit. Needless to say, corruption of the mind and money is at the centre of that deficit.
Dr Muhumuza is a development economist committed to inclusive growth through markets that work for the poor.
fmatwooki@yahoo.com
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